Internal Control Questionnaires and Verification Procedures

Internal Control Questionnaire

1. Are EM policies and procedures approved by the board or designated committee?

   1. Are they updated on a timely basis, particularly when new products are introduced?

2. Do policies provide clear guidance to traders, supervisors, and risk managers?

   1. Do the policies include trader limits, position limits, and stop-loss limits?

3. Do policies adequately describe documentation requirements for EM products?

   1. Do policies address the new product approval process?

4. Do policies address after-hours or off-premises trading?

5. Is the trading desk functionally independent/separate from back office operations?

6. Are traders excluded from:

   1. Posting transactions to the general ledger?

   2. Revaluing positions for financial reporting purposes?

   3. Settling trades and other paying/receiving functions?

   4. Reconciling trading and correspondent accounts?

7. Is there an independent risk oversight unit that monitors trading limits and exposures?

8. Do information systems translate technical risk measurements into a format that is easily understood by senior management and the board?

9. Is there a comprehensive internal/external audit program that assesses all EM trading activities?

   1. Is the audit frequency appropriate?

   2. Are audit findings presented to senior management and the board?

10. Are all correspondent/nostro accounts used for settlement reconciled at least monthly?

    1. Are stale items cleared in a timely fashion?

11. Do personnel independent of the trading function establish credit limits?

    1. Are limits established using a standard credit evaluation process?

    2. Are credit exposure reports regularly produced, compared to limits, and provided to the trading desk and independent risk oversight unit?

    3. Are credit limits periodically reviewed for appropriateness?

12. Are stress simulations periodically conducted to estimate how EM portfolios will perform in unstable markets (e.g., with currency devaluations, foreign investment outflow, recession, social unrest)?

13. Is there a model validation process?

    1. Is there a model validation process?

    2. Are algorithms (yield curve construction, interpolation methods, etc.) documented?

    3. Are system limitations documented?

    4. Are models and assumptions reevaluated periodically?

14. Is risk-management reporting sufficiently independent from the trading desk?

    1. Do reports cover credit risk, price risk, liquidity risk, transaction volumes, profit/loss?

    2. Other applicable risks?

    3. Do reports relate risk to capital and/or earnings?

15. Is management knowledgeable of foreign laws governing the trading of a particular country’s debt and securities?

    1. Is there a process to ensure compliance with applicable laws and regulations?

16. For securities in the custody of others, are custody statements periodically reconciled to position ledgers?

    1. Are differences promptly resolved?

17. Are there controls to limit settlement risk?

    1. Are standard settlement instructions used?

18. Are EM securities physically safeguarded to prevent loss, unauthorized disposal, or use?

    1. Are negotiable securities kept under dual control?

    2. Are securities counted frequently (on a surprise basis) and reconciled to internal records?

19. Is registered mail used for mailing physical securities?

    1. Are receipts maintained for such mailings?

20. Is there adequate control over trade tickets?

    1. Do alterations to trade tickets and other trade documents require the signature of the authorizing party?

    2. Do tickets contain all the necessary trade details?

21. Is the process of trade execution separate from that of confirming, reconciling and revaluing?

    1. Are personnel responsible for releasing funds excluded from the confirmation responsibilities?

22. Does the operations area (not the trading desk) control the confirmation process?

    1. Are all confirmations handled by operations?

    2. Are incoming confirms matched/compared to internal documents (e.g., trade tickets, outgoing confirms)?

    3. Are signatures on confirmations verified?

    4. Are outgoing confirmations sent within 24 hours of the trade?

    5. Does the operations unit review discrepancies between confirmations and internal trade documents?

    6. Are discrepancies reported to front-office traders and supervisors?

23. Are officers who participate in LDC debt renegotiations excluded from trading EM products?

24. Are there procedures for the resolution of disputed trades?

25. Is the frequency of EM product revaluation adequate?

    1. During revaluation, are traders unable to change market prices obtained from independent sources?

26. Do securities sub-ledgers accurately reflect market values obtained from outside sources?

27. Does management monitor the entry/exit of major market makers and institutional investors in EM products?

    1. Are bid-ask spreads watched to assess the relative depth of the market?

28. Are there procedures covering failed securities transactions?

    1. Are fails periodically reconciled to the general ledger?

29. Is there a documentation tracking system?

    1. Are there follow-up procedures to obtain missing documents?

30. Are telephone lines at trading desks recorded/taped?

31. Do traders maintain blotters or journals that chronologically track trades and keep a running total of positions?

32. Do supervisory personnel sign off on accounting reversals to sub-ledgers and trial balances on?

    1. Is the reasoning properly documented?

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